RECENT DEVELOPMENTS IN INTERNATIONAL FINANCE

MANAGEMENTTHE LAST FIVE YEARS

THE OUTLINES

• Introduction.•Key regulations & proposals.• International finance governance structure.•New standards for evaluating financial management.•New framework for the international finance governance structure.•Membership reforms.•Global financial structure.• IMF Quotas.•Challenges for the international financial system.

INTRODUCTION

• The international financial system has been reshaped after every crisis by new regulations.• The 1929-30 great depression: Glass-Steagall Act.• The 1973-74 oil price crisis: Basel committee on banking

supervision.• The 1982 Latin America debt crisis: Basel I.• The 1994-95 Mexican crisis and the 1998-99 Asian crisis:

Basel II.• The 2001-02 Inron, WorldCom: Sarbanes Oxley.

KEY REGULATIONS AND PROPOSALS• Adoption of Basel III capital requirements, including a

countercyclical capital buffer and a surcharge for globally systemically important financial institutions (G-SIFIs), both of which represent a first international attempt to institute a macro prudential tool.• The rules are: a 4.5 percent basic and a 2.5 percent conservation

buffer requirement for all banks; a 2.5 percent countercyclical buffer in the boom phase of the financial cycle. Altogether, the highest minimum requirement in the form of common equity (Tier 1) would be 12 percent. In addition to this would be 1.5 percent alternative Tier 1 equity and 2 percent Tier 2 (hybrid) forms of capital. These ratios all apply to risk-weighted assets.

KEY REGULATIONS & PROPOSALS (CONT’D)

• Agreement reached on one of two envisioned liquidity standards – the Liquidity Coverage Ratio (LCR).• The LCR, announced early 2013 by the BCBS, requires banks to have

enough liquidity, defined as having on balance sheet certain assets (High Quality Liquid Assets) and access to some facilities (including some forms of central bank liquidity), to cover 30 days of outflows.

• Some OTC derivatives reforms.• For requirements of the reporting and centralized clearing of some

types of OTC derivatives in some jurisdictions, as well as guidelines and minimum standards for centralized counterparties (CCPs) by the Committee on Payments and Settlement Systems and the International Organization of Securities Commissions (“CPSS-IOSCO”, 2012).

KEY REGULATIONS & PROPOSALS (CONT’D)

• Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) created the Working Group on Margining Requirements (WGMR) to establish global requirements for margining of non-cleared OTC derivatives. In September 2013, the WGMR published a final policy framework for non-centrally cleared derivatives. The final framework imposes wide-ranging changes such as the universal exchange of variation margin (VM) and initial margin (IM). Compliance with VM requirements across all regions started December 1, 2015.

• Banks, financial institutions and companies are asked to disclose more; formal rules requiring the retention of underlying assets have been instituted in various jurisdictions; and accounting information on off-balance sheet vehicles, such as Special Investment Vehicles (SIVs) and conduits, must be consolidated.• BCBS suggested a minimum Tier 1 leverage ratio of 3% during the parallel run

period from 1 January 2013 to 1 January 2017.

KEY REGULATIONS & PROPOSALS (CONT’D)

• The too-big-to-fail financial institutions has been revised in which the systemically important financial institutions (SIFIs) are subjected to more intensive prudential regulatory requirements, including higher capital requirements and more scrutiny of their cross-border operations. • Assessment of the global systemic importance of

banks (G-SIBs) and insurers (G-SIIs) have been issued and 28 G-SIBs and 9 G-SIIs have been designated. •Capital requirement include an up to 3.5% G-SIBS

surcharge.

INTERNATIONAL FINANCE GOVERNANCE STRUCTURE

G20 Financial Stability Board (FSB) International Monetary Fund (IMF) Financial Action Task Force (FATF) International Accounting Standards Board (IASB)Basel Committee on Banking Supervision (BCBS) International Association of Deposit Insurers (IADI)International Association of Insurance Supervisors (IAIS)Committee on Payment and Settlement Systems (CPSS)International Organization of Securities Commissions (IOSCO) International Auditing and Assurance Standards Board (IAASB)Organization for Economic Co-operation and Development (OECD)World Bank (WB)

NEW STANDARDS FOR EVALUATING FINANCIAL MANAGEMENT

• FSB has designated the Standards under the 12 policy areas as key for sound financial systems & deserving of priority implementation depending on country circumstances. While the key standards vary in terms of their degree of international endorsement, they are broadly accepted as representing minimum requirements for good practice that countries are encourages to meet or exceed.

• Macroeconomic Policy and Data Transparency

• Financial Regulation & Supervision

Area Standard IssuerMonetary & financial policy transparency

Code of Good Practices on Transparency in Monetary & Financial Policies

IMF

Fiscal policy transparency Code of Good Practices on Fiscal Transparency IMFData dissemination Special Data Dissemination Standard

General Data Dissemination SystemIMF

Area Standard IssuerBanking supervision Core Principles for Effective Banking Supervision BCBSSecurities regulation Objectives and Principles of Securities

Regulation IOSCO

Insurance supervision Insurance Core Principles IAIS

• Institutional & Market Infrastructure

Area Standard IssuerCrisis resolution and deposit insurance

Core Principles for Effective Deposit Insurance Systems

BCBS/IAD

Insolvency Insolvency and Creditor Rights World Bank

Corporate governance Principles of Corporate Governance OECDAccounting and Auditing International Financial Reporting Standards

(IFRS)International Standards on Auditing (ISA)

IASBIAASB

Payment, clearing and settlement

Core Principles for Systemically Important Payment SystemsRecommendations for Securities Settlement SystemsRecommendations for Central Counterparties

CPSSCPSS/IOSCOCPSS/IOSCO

Market integrity Forty Recommendations and 9 Special Recommendations on Money Laundering and Terrorist Financing

FATF

NEW FRAMEWORK FOR INTERNATIONAL FINANCE GOVERNANCE STRUCTURE

• G20 was established in 1999, but since the onset of the Global Financial Crisis it has taken an enhanced role in shaping international financial regulatory arrangements.• The FSB undertakes analysis of topics which are relevant across

financial subsectors – each of which has its own international standard setters. Those include the Basel Committee (banking), IOSCO (securities markets), IADI (deposit insurance), and IAIS (insurance), as well as the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB).

CONT’D• An expansion of IMF’s role, especially by substantial increases in

the funds available for crisis lending and emergency liquidity provision. By taking this step, IMF can function as lender of the last resort. However the available funds at this moment may be insufficient to fully play this role.• The memberships of the key international standard-setting bodies

(ISSBs) have been widened to include major emerging economies. The Financial Stability Board (FSB), which was established as the successor to the FSF in 2009, and the BCBS have extended their memberships to incorporate all G20 members. The CPMI has opened its membership to Brazil, China, India, Korea, Mexico, Russia, Saudi Arabia and South Africa. In addition, Brazil, China and India have joined the IOSCO’s Technical Committee.

CONT’D• The financial regulation has shifted away from a sole focus on micro-

prudential regulation and supervision - the regulation of individual banks and financial firms - to a broader focus on the whole financial system and how it relates with the broader economy. This is called macro-prudential regulation. • macro-prudential regulation has involved, for instance, devising regulatory

standards to measure and limit leverage levels in the financial system, meeting the counter-cyclical capital requirements that ask banks to hold more regulatory capital during good times and permitting them to hold less than would be usually required during the bad times.

• In general, the evolved topics of the international standard setting bodies revolve around effective resolutions regimes, the financial inclusion services, inclusive financial consumer protection, digital financial inclusion and the capital market activities of small and medium enterprises (SME).

ISSB MEMBERSHIP REFORMS (OLD MEMBERS)  FSB BCBS

IOSCO Technical

CommitteeCPSS

Australia X (2) X X XBelgium   X   XCanada X (3) X X (2) XFrance X (3) X X XGermany X (3) X X XHong Kong X (1) X X XItaly X (3) X X XJapan X (3) X X XLuxembourg   X    Netherlands X (2) X X XSingapore X (1) X   XSweden   X   XSwitzerland X (2) X X XUK X (3) X X XUS X (3) X X X

ISSB MEMBERSHIP REFORMS (NEW MEMBERS)

  FSB BCBSIOSCO

Technical Committee

CPSS

Argentina X (1) X    Brazil X (3) X X XChina X (3) X X XIndia X (3) X X XIndonesia X (1) X    Mexico X (2) X XX XRussia X (3) X   XSaudi Arabia X (1) X   XSouth Africa X (1) X   XSouth Korea X (2) X   XSpain X (2) XX XX  Turkey X (1) X    

REPRESENTATIVENESS OF THE FINANCIAL STABILITY FORUM/BOARD MEASURED BY WORLD RESERVES

Rest of the world74%

Old FSF26%

Rest of the world Old FSF

Rest of the world20%

New FSB80%

Rest of the world New FSB

Old FSF Representation

New FSF/B Representation

GLOBAL FINANCIAL STRUCTURE

FINANCIAL STRUCTURES IN EURO ZONE, JAPAN, UK & US

IMF QUOTAS • Quotas are denominated in Special Drawing Right (SDR), IMF unit of

account.• In December 2010 the IMF quotas was agreed to be increased by 100%.• The conditions for implementing the quota increases agreed under the 14th

General Quota Review were met on January 26, 2016. As a result, the quotas of each of the IMF’s 189 members increased to a combined SDR 477 billion (about US$668 billion) from about SDR 238.5 billion (about US$334 billion). • The loan size per quota of IMF members was raised from 300% to 600% in

average, in exceptional cases, the loan size reached around 2,300% of quota for Portugal and 2,158% of quota for Greece. • In August 2016, China’s renminbi was recognized as international reserve

currency and included in the SDR basket.

CHALLENGES FOR INTERNATIONAL FINANCIAL SYSTEM

•The rise of the shadow banking system.•Repos and hot money.•More regulations are needed for financial intermediaries.

The end